By
Dermot Doherty
October
16, 2012
Nestle SA rules
the high-end coffee market in Europe with Nespresso capsules. Green
Mountain Coffee Roasters Inc. dominates the U.S., leaving China as the biggest
land grab for premium portioned coffee.
Nestle, due to present
results from a Chinese location for the first time tomorrow, has prepared for
rising demand in the Asian country with Nespresso machines celebrating the year
of the dragon decorated by Hong Kong-based luxury brand Shanghai Tang. Starbucks
Corp.said in April it plans to introduce its Verismo single-serve system in the
country in 2013.
With Chinese consumers
drinking only three cups of coffee per capita each year, compared with 604 for
the French, the companies are wagering that there’s latent demand in cities
such as Shanghai, where rising wealth is whetting appetites for western
luxuries. Mondelez International Inc., the snacks and coffee business spun
off from Kraft Foods Inc., is also considering introducing its Tassimo coffee
maker in China.
“There may be a bit of
a fight in China as the coffee market there generally is embryonic,” said Jon
Cox, an analyst at Kepler Capital Markets.
Sales of coffee pods
in China climbed 50 percent last year, compared with 19 percent growth for
standard ground coffee, according to researcher Euromonitor International.
Still, they represent only about 0.1 percent of the country’s coffee market,
illustrating the scale of the opportunity for manufacturers.
‘Inflection Point’
“The number of
middle-class consumers in China is expected to increase fivefold between now
and 2030, so it could be that coffee companies think the inflection point for
single-serve in China is now,” said Warren Ackerman, an analyst at Societe
Generale in London with a buy recommendation on Nestle shares.
Nespresso entered the
country in 2007 and has three boutiques there. Its expansion plans haven’t been
disclosed.
“We are focused on
nurturing the budding coffee culture in the country,” said Mark Leenders,
Nespresso’s director for Southeast Asia, Greater China and Korea. “The consumer
interest is clearly evident any time you walk down a street in Shanghai or any
other city in China and see the proliferation of brands and coffee shops.”
Nestle, whose Nescafe
instant brand is the source of two- out-of-three cups of coffee in the Asian
country, may say tomorrow that organic revenue increased 6.3 percent in the
nine months through September, according to the average of 12 analysts surveyed
by Bloomberg. Excluding price increases, sales gained 3.2 percent, the
estimates show.
Second-Largest Market
Nespresso, which had
revenue of 3.5 billion Swiss francs ($3.8 billion) in 2011, or 4 percent of
Nestle’s sales, has been one of the company’s fastest-growing areas.
China is set to become
Nestle’s second-largest market, after the U.S., this year, according to
Ackerman. He estimates sales from that market may reach 5 billion Swiss francs
in 2012, rising to nearer 6 billion francs after including the still-to-
be-completed purchase of Pfizer Inc.’s infant-nutrition unit.
Soluble coffee has
played a big part in the Chinese growth of Vevey, Switzerland-based Nestle,
with an average annual growth rate of 20 percent for brands that are used at
home.
The soluble market
accounts for the bulk of coffee retail sales in China, rising fivefold between
2004 and 2011 and set to almost double to $1.96 billion in the period through
2015, according to researcher Mintel. The expansion of Starbucks, the world’s
largest coffee-shop operator, which has been in the country since 1999, is now
helping to introduce higher-end coffee to consumers. The Seattle-based company
plans to triple the number of its outlets in China to more than 1,500 by 2015.
More Competition?
“Experience from other
markets tells us that once people get used to having a fresh cup of coffee in
places like Starbucks, it’s very hard to go back,” said Jonny Forsyth, an
analyst at Mintel in London.
While Green Mountain
focuses on the North American market, Mondalez may soon add to the competition
in China.
“In cities like
Shanghai and Beijing, a coffee shop culture is developing and there’s a fertile
ground for single- serve,” said Hubert Weber, president of Mondelez’s coffee
unit.
Chinese consumers may
switch to portioned coffee directly from instant coffee and skip the phase of
drinking filtered coffee, according to the executive.
“I would compare it to
mobile phones and landlines -- when you’ve never had a landline, you go
straight to a mobile phone,” Weber said.
Still, beverage
companies seeking to capitalize on the growth of China’s coffee market have to
be prepared for a long haul, said Hope Lee, an analyst at Euromonitor in
London.
“China is definitely
one of the major growth markets, but it’s still mainly young urban consumers
and the majority of Chinese still prefer to drink tea, so companies will need
to be patient,” she said.
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To contact the reporter on this story: Dermot Doherty in Geneva
at ddoherty9@bloomberg.net
To contact the editor responsible for this story: Celeste Perri
at cperri@bloomberg.net